The New York City Municipal Water Authority is poised to price around US$450m worth of revenue bonds, as investors continue to swallow-up public debt deals.
The New York metropolitan municipality aims to issue the water and sewer system second resolution revenue bonds, Fiscal 2020 Series AA, in large part to refund certain outstanding debt obligations.
Also, around July 17, 2019, the Authority expects to issue an additional US$400m of its water and sewer system revenue bonds, Fiscal 2020 Series BB, to help fund system improvements, as well as for certain issuance-related costs.
The Fiscal 2020 Series AA bonds, which have maturities that range from June 15, 2020-2040, are expected to price Tuesday. Raymond James is acting as the lead underwriter on the transaction.
To date, the Authority has sold around US$1.6bn and US$28.9bn of first and second resolution bonds, respectively, as well as US$27.6m in draws on bond anticipation notes issued to the New York State Environmental Facilities Corp. The Authority also has a US$600m commercial paper program, none of which is currently outstanding.
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Credit Profile
Moody’s Investors Service assigned investment-grade ‘Aa1’ credit ratings to both the Fiscal 2020 Series AA and Fiscal 2020 Series BB bonds, with a stable outlook.
Moody’s analyst Matthew Butler noted that the rating reflects “a strong claim on revenue generated by an essential service utility in a vast and healthy metropolitan area. The rating also incorporates the healthy liquidity of the water and sewer system, and strong rate management by the New York City Water Board.”
The ratings agency continued that while the deal is backed by “very strong” debt service coverage on a bond ordinance basis, it is “narrow on a net revenue basis especially relative to highly rated peers.” However, it added that the latter challenge is “mitigated by a bondholder-friendly flow of funds and the early set-aside of debt payments.”
Butler added that the stable outlook is based in part on the expectation that “the New York City Water Board will continue to adjust rates, as necessary, to maintain healthy liquidity and sound debt service coverage while generating new revenue in support of system maintenance.”
New York City’s water system provides an estimated 1,000 million gallons per day (mgd) of water to around 835,000 local accounts, serving 9.4 million residents, of which about 89.4% are in the City, with the balance in Westchester, Putnam, Orange and Ulster Counties.
The sewer system comprises an extensive network of sewage collection and treatment facilities that treat an estimated 1,230 mgd of wastewater.
Muni Inflows Undeterred
The deal falls against a backdrop of ongoing demand for municipal debt, amid a continued shortage of supply.
For the week ended June 19, Thomson Reuters/Lipper U.S. Fund Flows reported a net inflow – for the 24th straight week – of roughly US$726m into municipal bond funds – and about US$130m into ETFs such as the iShares National Muni Bond fund (NYSEARCA: MUB) and the Vanguard Tax-Exempt Bond fund (NYSEARCA: VTEB).
The MUB and VTEB ETFs have also been soaring to new heights, having gained 6.16% and 6.36% from their most recent 52-week lows, respectively.
Meanwhile, a paltry US$5.7bn of new muni bond issuance is set to price in the week ahead, underscored by the New York City Municipal Water Authority’s US$450m worth of revenue bonds.
According to analysts at Janney Montgomery, since the 10-year municipal to Treasury ratio bottomed at 72% a month ago, “this relative value indicator has been moving higher, reflecting some investor resistance to falling tax free yields, which reached post-2016 election lows on Thursday”.
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The 10-year Bloomberg AAA benchmark yield dropped by 13 basis points in the past 30 calendar days, while the like maturity Treasury yield is 37 bps lower over the same time period.
The yield on the 10-year U.S. Treasury note was last hovering at around 2.01% Monday.
Janney Montgomery added that recent deals, such as the Pittsburgh Water and Sewer Authority’s bonds maturing in 2037, and the Pennsylvania Turnpike Commission’s 4% subordinated debt due in 2049, received “strong aftermarket response,” in part due to “the challenge faced by mutual fund portfolio managers, who continue to see strong inflows of cash that must be put to work.”
Given the dynamics of the U.S. municipal bond market, the upcoming New York City Municipal Water Authority’s issuance is likely to be met with decent interest.
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